A Journal by the Keck Center for International and Strategic Studies at Claremont McKenna College

David Dapice on economic growth in Vietnam

David Dapice joined Tufts University in 1973 after graduating from Williams College (BA, political economy) and Harvard University (PhD, economics) He has worked extensively as a development economist in Indonesia, Vietnam and Myanmar and has also done significant work in Southeast Asia, Mongolia and several other nations. After serving as Chair of the Economics Department, he has worked since 1990 as the economist of the Vietnam and Myanmar Programs in the Kennedy School on a half-time basis. His work has included helping to establish the KUPEDES rural credit program in Indonesia, work at the World Bank and UN on nutrition issues, and work on energy issues in several nations. He continues to travel to Asia several times a year for work on development issues, now primarily in Myanmar and Vietnam. He stepped down from his Tufts position in 2016 but continues his work with the Harvard Kennedy School. On March 18, 2017, he spoke with Aleena Ali CMC '17.

Photograph and bio courtesy of Dr. Dapice.

What are the primary factors responsible for Vietnam’s impressive economic growth in the last few decades? What explains its resilience to the recent regional slowdown? Are there any vulnerabilities underlying its impressive economic trajectory?

Ans. Vietnam’s initial economic gains were largely due to the replacement of socialist mechanisms with market mechanisms and decollectivization. Subsequent gains were mostly due to Vietnam joining global trade. It received investment flows and high foreign direct investment, which supported exports of manufactures. Policies supporting agriculture are now fading and substantial investments in education and health have allowed for decent wages in the export sector, relative to the wages in the agricultural sector.

Poverty in Vietnam has fallen from 60 to 21 percent of the population over the past 20 years. To what extent has the overall reduction in poverty impacted rural areas and ethnic minorities? What are the main economic challenges to reducing further the extent of poverty and inequality in Vietnam?

Ans. In the last decade, poverty has been reduced by half, if not more, with most of the decline in urban areas. For example, in the Red River Delta (Hanoi and more urban areas) the poverty rate fell from 13 percent to 3 percent between 2004 and 2015. In the area around Ho Chi Minh City, poverty fell from 6 percent to 0.7 percent. However, the largest percentage point decline in poverty occurred in very poor, rural areas. For example, poverty rates in the poorer central highlands fell from 29 percent to 11 percent. In the middling Mekong Delta, poverty rates fell from 15 percent to 6.5 percent.

However, as environmental pressures are building in the Mekong Delta and agriculture households are aging, it will be harder to reduce rural poverty through productivity growth or migration. Policymakers can either offer subsidies or encourage larger farm sizes to sustain the reduction of rural poverty.

The Vietnamese government has been engaged in privatization efforts for the last 15 years or so. What factors have impeded the realization of privatization initiatives thus far? What explains the contrast between domestic caution and international optimism regarding privatization?

Ans. In the Vietnamese context, privatization has not occurred so much as “equitization.” Equitization allows for government control but entails a partial sale of state-owned enterprises to private investors. The current arrangements suit the managers of state-owned enterprises, since they afford them a great deal of lobbying power. As a result, privatization efforts have proceeded very slowly. International investors are aware of this and they do not invest large sums of money in firms that remain socialist. Also, there is very little open criticism of the privatization process. International organizations and aid agencies only offer soft criticism of Vietnam’s privatization efforts, since Vietnam is doing well relative to many other developing countries.

Currently 97 percent of Vietnam’s economy is comprised of small and medium enterprises. What explains the preponderance of SMEs and what reforms are needed to enable them to grow?

Ans. The number of small and medium firms is quite high in most places. However, the performance of small and medium firms has not been that dynamic. Most of the economic dynamism is in larger, private firms, which comprise mostly of foreign direct investors and some private, often well-connected, domestic firms. As the private sector is quite weak outside of politically-connected and foreign firms, small and medium enterprises are less competitive. This has resulted in lower value-added exports. For example, the percentage of value addition for electronics is often in the single digits. These factors combine to make the economy less dynamic and equal. The "valley of extortion" becomes evident in Vietnam’s Chamber of Commerce Surveys, where informal firms pay low and predictable informal payments and large firms are able to articulate their concerns if payments get too high. However, newly formal firms in competitive industries pay a crushing five to 10 percent of sales in informal payments. This depresses their growth and the growth of the economy.

Vietnam’s demographics are presently characterized by falling mortality rates and decreasing fertility rates. What are the implications of these demographic changes for its economy? Are they likely to impel structural changes within it?

Ans. Similar to many developing countries in Asia, Vietnam will face slower population and labor force growth in the next decade. Population and labor force growth are projected to be between 0.5 to 1 percent. The population is also aging due to the combination of falling fertility and increasing life spans. Although this is a problem, it is less severe in Vietnam than in China or Korea. Even though the total fertility rate is already below the replacement level of 1.8, demographic momentum will keep numbers gently growing for a while.

Considering that China is Vietnam’s largest trading partner, how is China’s economic slowdown likely to impact Vietnam’s growth trajectory? Do ongoing and future structural changes within the Chinese economy present opportunities for Vietnam to expand its share of production in global supply chains?

Ans. Chinese purchases only account for 10 to 12 percent of Vietnam’s exports, most of which are commodities. These purchases are unlikely to decline during a Chinese economic slowdown. However, as China supplies approximately 30 percent of Vietnam’s imports, a slowdown may result in fierce competition for goods that are both imported and produced in Vietnam. It is likely that higher wages in China may result in some lower-end industries moving to Vietnam. However, Vietnam’s ability to expand its share of production in global supply chains may be limited by rising Vietnamese wages, as well as competition from robots and workers in other lower-wage countries. Without a more dynamic small and medium enterprise sector, gains for Vietnam are likely to be limited.